Turkey’s 'megaprojects' off to disappointing start

In an outcome that many have long feared, Turkey’s “megaprojects” are underperforming, meaning the government now has to compensate the construction companies under contract terms.

REUTERS/Murad Sezer

Red and white balloons are released during the opening ceremony of newly built Yavuz Sultan Selim Bridge, the third bridge over the Bosporus and one of the country's so-called megaprojects, Istanbul, Turkey, Aug. 26, 2016.

The Turkish government’s megaprojects have never been short of controversy, especially after 2011 when they formed the backbone of the Justice and Development Party’s (AKP) election platform that year.

The latest project to build a suspension bridge over the Dardanelles Strait kicked off with fanfare earlier this month, touted as a message of “Turkey’s greatness” to the world. A common feature of the projects, which are built as public-private partnerships (PPP), is their voter-centered political motivation, which seems to take precedence over other considerations, such as feasibility and public interest.

Recently completed megaprojects have already begun to inflict damage on public finances. The loan debts of companies involved in the projects are also cause of concern, with Ankara’s fledgling sovereign wealth fund expected to throw some lifesavers.

The main criticism against the projects stems from the lack of accountability and transparency. Though the projects make a significant part of public investments, both parliament members and the Court of Accounts, which functions as public auditor on behalf of parliament, are struggling to gain access to the contracts.

The hallmark of the PPP projects is the government’s provision of revenue and financing guarantees to the private companies involved. The revenue guarantee entitles the company to a minimum revenue once the project becomes operational, meaning the government is supposed to use budget funds to cover the guaranteed sum if the project underperforms. Thus far, no such payment is known to have been made, but some contracts require payments to begin in May.

So which megaprojects are underperforming, and how much is the government going to pay to cover the gaps?

Thus far, the most explicit and officially confirmed losses stem from the Osmangazi Bridge, which is part of the Gebze-Izmir motorway project and became operational last summer. The total revenue guarantee for the project, which the company will operate for 15 years, is 40 billion Turkish lira (about $11 billion).

In early March, Haydar Akar, a deputy for the main opposition Republican People’s Party, disclosed figures he obtained from the relevant authorities, according to which the public losses incurred from guarantees for the bridge amount to 227 million Turkish lira (about $62 million) in the first 50 days of the year.

Under the contract, the toll of the Osmangazi Bridge is pegged to the dollar. In January, following the dollar’s dramatic rally against the Turkish lira, the toll reached 133 Turkish lira ($37), or almost a tenth of the minimum wage. The government instructed the company to reduce the toll to 68 Turkish lira ($19), promising to cover the 65 lira difference from the budget. An additional burden came from the lower-than-projected traffic. In January, only 380,000 vehicles passed from the bridge, while the guarantee was for 1,240,000 vehicles. On a daily average, this meant 12,000 vehicles as opposed to 40,000 guaranteed.

As a result, for January alone, the government owes the company 25 million lira ($6.9 million) to compensate for the discount and another 114 million lira ($31 million) for the lower-than-projected traffic. For the first 20 days of February, the sum stands at 86 million lira — 19 million lira to make up for the discount and 67 million lira for the demand shortage.

If the Osmangazi Bridge continues to incur losses, the compensation sum could reach roughly 1.6 billion lira (about $439 million) at the year-end. And this could continue for years.

The third bridge over the Bosporus and the Eurasia Tunnel, an undersea motorway between its European and Asian shores, are two other “megaprojects” that are currently operating in the red.

In the North Marmara Motorway project, which includes the third bridge over the Bosporus, the company’s operation period is nearly eight years and the revenue guarantee is worth close to $6 billion.

Operational since August 2016, the bridge has a guarantee for 135,000 vehicles per day. Under the contract, the toll is calculated as $3 plus VAT, which makes about 12 Turkish lira today. According to Transport Minister Ahmet Arslan, daily traffic has reached about 110,000 vehicles, which is 25,000 vehicles short of the guaranteed number. In terms of compensation for the operator, this means about 300,000 Turkish lira per day.

In the Eurasia Tunnel, open since December 2016, the government guarantee is for 69,000 vehicles per day. The toll is set at $4 plus VAT for cars and $6 plus VAT for vans. The transport minister has put daily traffic at 24,000 vehicles, which — based on an average toll of $5 — means a daily compensation of $222,500 for the operator.

When it comes to the Dardanelles Bridge, the guarantee is for 45,000 vehicles per day. The $10.5 billion project has been awarded to a consortium between South Korea’s Daelim and SK Group and Turkish companies Limak and Yapi Merkezi. The groundbreaking ceremony took place on March 18, coinciding with the 102nd anniversary of the Battle of Gallipoli, which inspired the Turkish name of the bridge: 1915 Canakkale.

The losses that have surfaced so far could be the tip of the iceberg, given that an array of projects are still in the construction stages. The third airport for Istanbul, for instance, involves guarantees on a much bigger scale. According to a study by BETAM, the research center of Istanbul’s Bahcesehir University, the State Airports Authority has granted the contractor guarantees worth 6.3 billion euros only for international and transit passengers in the first 12 years of the 25-year contract. This means the Treasury would make up for any difference if the operators’ annual revenue falls short of 525 million euros.

In another major project, the government has granted 25-year operational rights to the builders of giant health campuses, where public hospitals will operate as tenants. According to Development Ministry data, the total rent to be paid to the companies is projected at $27 billion. The companies will also be entitled to compensation if the hospitals’ occupancy rate falls below 70%.

The PPP model is widely implemented across the world today, both in developed and emerging economies. With its existing project stock, Turkey is among the leaders. The AKP often brags that huge investments are made without a penny from public coffers, but how much public interest is prioritized in shaping the projects remains open to discussion.

Many believe the revenue guarantees rest on unrealistic assumptions. The traffic projections, for instance, are based on the assumption that Turkey’s annual economic growth would not fall below 5% on average. This applies also to assumptions that abundant inflows of foreign funds would continue and keep the dollar in check, which apparently formed the base for pegging bridge tolls to the dollar.

But as the Turkish proverb says, “A calculation made at home goes awry at the market.” Economic growth has declined and the greenback has soared against the lira. The populist drive behind all those investments seems to already be resulting in black holes that will enlarge public deficits.

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Mustafa Sonmez is a Turkish economist and writer. He has worked as an economic commentator and editor for more than 30 years and authored some 30 books on the Turkish economy, media and the Kurdish question.

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